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As many of us watch and wait for a potential stock market pull-back, I'd like to present a possible pattern that may be in place on the Russell 2000 Index chart.
Notice how in 2011 and 2012 the index consolidated beneath the previous all-time high that was placed in 2007 (e.g. all-time high represented by the horizontal green line). Also note how in that same time frame, the index established itself into a well-defined bullish trend channel, shown as the upward rising parallel red lines. But the potential pattern I wish to showcase here is the one presented by the blue triangle.
The blue triangle could represent one of technical analysis's most basic patterns, the ascending triangle formation. Note that during 2011 and 2012, as the index continued to rise and re-test the all-time high, it continued to make higher lows in the process. In doing so, the index etched out the triangle formation that is highlighted in blue. Since the slope of the trend-line formed by the triangle's right side is rising up against a horizontal base, it's called an ascending triangle.
The ascending triangle is considered a bullish chart pattern because bullish market energy is developed during the consolidation period. Market participants initially respect the old level of resistance, so the market cannot move above it; but at the same time, each subsequent market sell-off is gradually greeted with less selling interest. Correspondingly, each market pull-back that follows tends to evaporate more quickly. That's why higher lows become the norm as the pattern develops. Eventually, as bullish consensus continues to grow, the market finally moves above the old resistance area. The pent-up energy developed during the cat and mouse game of uncertainty often gives way to a strong bullish outlook once the resistance is vanquished.
The Russell's potential ascending triangle is noteworthy because of the significant bullish implications rendered from its size. It wasn't formed on a 30 minute bar chart. It took two years to form on a weekly bar chart. Granted, the final push through the all-time high was not accompanied by the typical large volume that increases the likelihood of this pattern, but lack of trading volume has been the norm for this cyclical market rebound. It's possible that the two major market failures of 2000 and 2007, which were followed by market breaks that were 50% or greater, have disillusioned investors as markets again test those levels. However, that does not preclude investors from gaining confidence as time elapses. If they do, upside volume may return, taking the market to even greater heights.
In conclusion, no one can tell you with certainty that the Russell's triangle formation is an ascending pattern that will go to completion, and it is a bit disconcerting that volume did not spike when the index pushed through to new highs. On the other hand, the market's trend is currently bullish, and in addition to the potential ascending triangle, a well-defined bullish trend channel which provides additional clarity to bullish parameters is in place. I recommend watching the rising support line of the bullish trend channel, and obviously the triangle's support base as well. Any significant breaches of those support levels would negate those patterns and suggest the bullish trend was over. However, if those support levels hold, significant bullish potential for the Russell 2000 Index and perhaps for the broader market remains intact.
Chief Investment Strategist
Preferred Planning Concepts, LLC
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Des Plaines, IL 60018
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